Federal prosecutors accuse a digital currency of money laundering; What does it mean for Bitcoin?

Federal prosecutors just dealt a major blow to the world of digital currencies, leaving many wondering about the implications for Bitcoin, the most well-known instrument of its kind. One of the biggest questions surrounding digital currencies has been their anonymous nature, which could be exploited to conduct criminal activity. That was addressed in Tuesday\’s take down of Liberty Reserve, a digital currency operator that called itself the \”largest payment processor and money transfer system,\” according to the indictment.

U.S. Attorney for the Southern District of New York Preet Bharara on Tuesday unveiled the indictment against Liberty Reserve and seven employees for alleged money laundering. Prosecutors said five have been arrested and charged for money laundering and operating a money-transmitting company without a license. The Liberty Reserve domain name was seized by authorities.

Liberty Reserve provided users with an \”instant, real-time currency for international commerce,\” according to the press release. The digital currency was called Liberty Reserve, or LR, and accounts needed to use the currency didn\’t require official identification documents or anything to validate users\’ identities. That led to users with false names like \”Russia Hackers\” and \”Hacker Account\” that hinted at alleged criminal activity.

The company was incorporated in 2006 in Costa Rica and its founder Arthur Budovsky, who was among those arrested, shed his U.S. citizenship for Costa Rican citizenship.

Excerpts from the indictment:

Through the defendants’ efforts, Liberty Reserve has emerged as one of the principal means by which cyber-criminals around the world distribute, store and launder the proceeds of their illegal activity.

Because virtually all of Liberty Reserve’s business derived from suspected criminal activity, the scope of the defendants’ unlawful conduct is staggering. Estimated to have had more than one million users worldwide, with more than 200,000 users in the United States, Liberty Reserve processed more than 12 million financial transactions annually, with a combined value of more than $1.4 billion. Overall, from 2006 to May 2013, Liberty Reserve processed an estimated 55 million separate financial transactions and is believed to have laundered more than $6 billion in criminal proceeds.

Merchants that accepted LR as a form of payment allegedly included: “traffickers of stolen credit card data and personal identity information; peddlers of various types of online Ponzi and get-rich-quick schemes; computer hackers for hire; unregulated gambling enterprises; and underground drug-dealing websites.”

And online chats between two of the defendants acknowledged the illegal nature of activity with the currency: “explicitly described Liberty Reserve’s activities as “illegal” and noted that “everyone in USA” such as “DOJ” knows “LR is [a] money laundering operation that hackers use.”

In 2011, Liberty Reserve, together with Dwolla, was one of the main methods of moving money into Bitcoin exchanges to buy bitcoins, and can be credited as being one of the chief enablers of the Bitcoin economy’s early growth at the time. The key feature that LR and Dwolla offered was the lack of chargebacks, meaning that exchanges could use these services safely without fear of a fraudulent customer buying depositing USD, buying and withdrawing bitcoins, and charging the USD back.

What\’s interesting is that this is the second strike on the so-called chief enablers of the early Bitcoin economy in May. A Dwolla account linked to Bitcoin exchange Mt. Gox was seized earlier this month by the Department of Homeland Security.

Also of note is Budovsky\’s previous venture Gold Age, Inc., which was an exchange for the once-popular digital currency E-gold, according to the indictment. Budovsky and another defendant were convicted in 2006 for operating an unlicensed money-transmitting business in relation to Gold Age, Inc.

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